The Financial Accounting Standards Board has released an update on its recent guidance on reference rate reforms to clarify its scope.
With reference reforms, banks and other financial institutions have been moving away from the London Interbank Offered Rate, or LIBOR, which have been subject in the past to manipulation by bankers and traders in pricing the interest rates on securities, and shifting to newer rates like the Secured Overnight Financing Rate, or SOFR, which are thought to be less prone to manipulation. FASB has been working in recent years to set standards to aid this transition as it takes effect in the financial markets. The
In March of last year, FASB issued guidance with the goal of easing the potential accounting burden expected when global capital markets move away from LIBOR, the benchmark interest rate that banks use to make short-term loans to each other. That guidance, known as
However, some of FASB’s constituents wondered whether last year’s guidance could be applied to derivative instruments that don’t reference a rate that’s expected to be discontinued but that employ an interest rate for margining, discounting or contract price alignment that’s modified as a result of reference rate reform. They pointed out that the modification, often known as a “discounting transition,” could have some accounting implications. They had concerns about the possible need to reassess a company’s prior accounting determinations pertaining to those derivatives and about the potential hedge accounting consequences of the discounting transition.
The amendments in the new update clarify that some of the optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting also apply to derivatives that are affected by the discounting transition. The update also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to customize the existing guidance to derivative instruments impacted by the discounting transition.
